The Business Environment

and Business Economics

 The Business Environment
 What is business economics?
– decision making in business
• external influences on the firm (the business environment) –
beyond the control of the firm (competitors, prices of raw
materials, economy)
• internal decisions of the firm – prices, quantity, marketing,
investment
• the external effects of business decision making – effect on
consumers, competitors
 What do business economists do?
of the company
– Description: goals, competition, cost of production
what happens when?
– Analysis: cost & profit, change in demand, price changes
– Recommendations: how to achieve objectives
 The Business Environment = external influence

often overlap.

 Political / legal factors

political pro/contra the market?
legal -> e.g. competition regulations. e.g. taxes

 Economic factors e.g. taxes

– the microeconomic environment: competition,

consumer tastes, production costs
– the macroeconomic environment: national and
international setting, government economic policy
-> see also legal factors, e.g. taxes

 Social / cultural factors social: sensitivity of the public regarding the environment? /
employment factors (working hours)
cultural: e.g. name of diet coke vs. cola light.
 Technological factors
 PEST analysis
– relations between the four sets of factors
– importance of the economic factors
 PESTEL analysis PEST + Environment + Legal
 The Structure of Industry

 Importance of industrial structure to the

performance of firms
 Classifying production
– primary production agriculture, fishing, mining

– secondary production manufacturing (processing products)

– tertiary production services

 Shares in GDP and employment of the three

sectors
– trends over time
– current position
 Output of industrial sectors
(as % of GDP)

1974 2011

Tertiary
54.9%
Tertiary
76.9%

Primary 2.8% Primary 3.1%

Secondary Secondary
42.3% 20.0%

--> deindustrilization
shift from manufacturing to services

Source: Based on data in UK National Accounts (Blue Book) and UK Economic Accounts (National Statistics, 2012)
 Employment by industrial sector
(% of total employees)

1974 2011

Tertiary
54.7%
Tertiary
77.0%

Primary 3.4% Primary 3.3%

Secondary
Secondary 19.7%
41.9%

Source: Based on data in Economic and Labour Market Review (National Statistics, various editions)
 The Structure of Industry
 Classifying firms into industries
– nature of an industry – e.g. car industry
e.g. transport including air and car industry
– industrial sectors – e.g. manufacturing, transport
– why classify firms into industrial sectors?
• helps in analysing trends – developing & declining
sectors
• identifying specific needs – e.g. improve infrastructure
• to understand relationships between firms
 Standard industrial classification (SIC 2007)
– nature of the system of classification
• based on supply characteristics of firms
– sections, subsections
• divisions, groups and classes
 Standard industrial classification: 2007
Section
A Agriculture, forestry and fishing
B Mining and quarrying A+B = Primary
C Manufacturing (in 24 divisions) C = Secondary
D Electricity, gas, steam and air conditioning supply rest: tertiary
E Water supply, sewerage, waste management and remediation activities
F Construction
G Wholesale and retail trade, repair of motor vehicles and motor cycles
H Transport and storage
I Accommodation and food service activities
J Information and communication
K Financial and insurance activities
L Real estate activities
M Professional, scientific and technical activities
N Administrative and support service activities
O Public administration and defence; compulsory social security
P Education
Q Human health and social work activities
R Arts, entertainment and recreation
S Other service activities
T Activities of households as employers;
undifferentiated goods and services producing activities of households for own use
U Extra-territorial organisations and bodies
Division (manufacturing)
10 Manufacture of food products
11 Manufacture of Beverages
12 Manufacture of tobacco products
13 Manufacture of textiles
14 Manufacture of wearing apparel
15 Manufacture of leather and related goods
16 Manufacture of wood and of products of wood and cork, except furniture;
manufacture of articles of straw and plaiting materials
17 Manufacture of paper and paper products
18 Printing and reproduction of recorded media
19 Manufacture of coke and refined petroleum products
20 Manufacture of chemicals and chemical products
21 Manufacture of basic pharmaceutical products and preparations
22 Manufacture of rubber and plastic products
23 Manufacture of other non-metallic mineral products
24 Manufacture of basic metals
25 Manufacture of fabricated metal products, except machinery & equipment
26 Manufacture of computer, electrical and optical equipment
27 Manufacture of electrical equipment
28 Manufacture of equipment not elsewhere specified
29 Manufacture of motor vehicles, trailers and semi-trailers
30 Manufacture of other transport equipment
31 Manufacture of furniture
32 Other manufacturing
33 Repair and installation of machinery and equipment
The classification of the manufacture of a tufted carpet

Section D Manufacturing (comprising divisions 10 to 33)

Division 13 Manufacture of textiles

Group 13.9 Manufacture of other textiles

Class 13.93 Manufacture of carpets and rugs

Subclass 13.93/1 Manufacture of woven or tufted carpets and rugs

The Determinants of Business Performance

 Structure  conduct  performance

– relationship between business structure and
business conduct (behaviour)
• competitive markets and competitive behaviour

• limited competition and collusion

competitive markets -> pro consumer (less profit)

– relationship between business conduct and business

performance big companies care more for market share /
revenue than only the profit.

• indicators for measuring performance

• profitability, market share, growth, etc.

The Determinants of Business Performance

 Internal aims
– profit maximisation as the prime goal
– other goals
separation of ownership and management needed

 Internal organisation
– distinction between owners and managers
– importance of managers’ own objectives
– satisficing behaviour of the managers
The Determinants of Business Performance

 Other factors affecting performance

– internal structure management layers
– information know the market to win the market
– competence of management
– quality of the workforce
– systems in the company

• information systems (IT)

• Motivation (salaries, bonuses)
• technical systems (specifications, quality control)
• distribution systems (logistics, supply chain)
• financial systems (accounting, auditing)